Too many private investors continue tooverlook UK insurance companiesdespite years of strong share price growth and healthy dividend yields, while remainingfar too patient with the troubled oil, supermarket and banking sectors. Should you now turn your attention to these two surpriseshoot-the-lights-out stocks?
Legal matters
Legal & General Group (LSE: LGEN) has seen its share price grow by 125% in the past five years, almost five times the return on the FTSE 100, which is upjust27% in that time. Thats despite slippingin the last year, when itsshare price sank 12%. L&Gs recent performance has been hit by stock market volatilityandfalling annuity sales in the wake of pension freedom reforms. Brexit struck the biggestblow although theshare price has recoveredinthe last five months, returning to pre-referendum levels. It has jumped12% in the last month.
Several factors continue to work in favour of L&G. Growing numbers of investors are turning onto the benefits of low-cost passive funds, and it stole a leadin this sector long ago. Auto-enrolment is that great rarity, a successful government pension reform, which will give millions access to a workplace scheme for the first time in their lives, and L&G has 20% of the market.
Buy in bulk
Individual annuity sales may beplunging but bulk annuity sales are soaring as companies look to decontaminatetheir defined benefit responsibilities, and L&Gis a growingin this area, in the US too. Its also building a presence in the equity release market, which shouldgrow strongly as more cash-strapped pensioners unlock capital in their propertyto augment their retirement income.
The big worry is wider economic uncertainty, because if this translates into falling share prices, sentiment towards L&G willalso take a hit. Another concern is that five years of double-digit earnings per share (EPS) growth will fallflat in 2017. However, at a forward valuation of 11.1 times earningsand forecast juicy yield of 6.2%, L&Gstill hasplenty of firepower.
Stay Pru
Asia-focused insurer Prudential (LSE: PRU) has done even better over the past five years, its share price up153% in that time. Its up 10% in the last month, like L&G, benefitting from hopes of a Trump reflation. However, Asia is its real trump card. The Prudelivered steady 6% half-year profit growth to 2bn in the summer buts itsAsia operating profit rose at 15% to743m, while Asianew business profit grew 20% to 824m.
The insurers geographical spread gives it a nice balance, withageing populations in its UK and US marketsrequiringretirement incomesolutions, and the younger Asian demographicsneeding protection and pension plans. Asia now accounts for one-third of its profits and we can expect that to continue growing.
Prudential still doesnt look overpriced, trading at a forecast 12.5 times earnings. The dividend yield remains relativelylow at 2.6% but progression has been positive, including a half-year 5% interim dividend increase to 12.93p per share. EPS are forecast to grow 13% in 2017 and Prustill looks a buyto me, althoughinvestors should consider what might happen if the China credit and property bubbles finally burst.
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Harvey Jones owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
